Sonoco Beats Q3 Earnings Estimates

Zacks

Sonoco Products Co. (SON) reported third-quarter 2013 adjusted earnings of 63 cents per share, managing to surpass the Zacks Consensus Estimate of 61 cents and increasing 14% from 55 cents earned in the year-ago quarter. Earnings were at the upper end of the company’s guidance range of 59 cents to 63 cents.

The quarter excluded 4 cents per share of an after-tax charge related to restructuring activities associated with the expected plant closure in Ireland and Canada. Including this, third-quarter 2013 earnings were 59 cents per share compared to 57 cents in the year-ago quarter which excluded gains of 2 cents per share from property insurance recoveries and restructuring related gains.

Operational Update

Net sales increased 3% year over year to $1.23 billion in the third quarter and were in line with the Zacks Consensus Estimate. The year-over-year sales improvement was attributed to gains in volume and mix from the Display and Packaging, Paper and Industrial Converted Products and Protective Solutions segments along with higher selling prices, partially offset by a decline in volume in the Consumer Packaging segment and the divestiture of box plant.

Cost of sales increased 1.5% year over year to $1003.7 million. Gross profit went up 8.7% year over year to $224 million. Gross margin grew 100 basis points (bps) to 18.25%, driven by strong productivity gains, volume growth and a positive price-cost relationship, partially offset by higher maintenance, labor and other costs.

Selling, general and administrative expenses increased 7% year over year to $118 million due to wage inflation and higher management incentives. Sonoco’s adjusted operating income rose 10.5% year over year to $106 million from $95.9 million in the year-ago quarter. Consequently, operating margin expanded 60 bps year over year to 8.6%.

Segment Performance

The Consumer Packaging segment reported net sales of $473 million compared with $476 million in the prior-year quarter, hurt by lower volume in metal ends. Operating profit of the segment, however, rose 12% year over year to $49 million. The improvement came on the back of positive price-cost relationship and productivity improvements, partially offset by lower overall volume.

Net sales at the Paper and Industrial Converted Products segment went up 3% year over year to $468 million, driven by higher selling prices, primarily associated with recovery in paper costs and volume and mix gains in North American and European industrial businesses. Operating profit at the segment also increased 13.5% year over year to $37.7 million.

Display and Packaging segment’s net sales increased 14% year over year to $143 million from $125 million in the year-earlier quarter. Operating profit increased near about twofold from the year-ago quarter to $8.9 million, driven by volume growth and an improved mix in global display and packaging activities, partially offset by higher labor and other costs.

Protective Solution segment’s net sales went up 1.4% year over year to $143 million. The increase was mainly driven by volume expansion in the industrial and consumer protective businesses, offset by the divestiture of a small box plant and volume declines in retail security packaging. Operating profit at the segment declined 7% year over year to $10 million, primarily due to higher labor and other operating costs, offset by changes in the overall sales mix and productivity improvements.

Financial Position

As of Sep 29, 2013, cash and cash equivalents were $287.6 million, compared with $373 million as of Dec 31, 2012. Cash flow from operating activities was $177 million in the reported quarter, compared with $152 million in the prior-year quarter. The company’s debt-to-total-capital ratio was 40.8% as of Sep 29, 2013, compared with 47.7% as of Dec 31, 2012.

Outlook

Sonoco expects fourth-quarter 2013 earnings per share in the range of 55 to 59 cents per share. However, the company revised the full-year earnings per share guidance in the range of $2.27 to $2.31 from $2.26 to $2.32. Sonoco has upwardly revised the free cash flow guidance to $190 million from $150 million for 2013.

Our View

Organic sales growth, geographic expansion and strategic acquisitions remain growth drivers for the company. Sonoco expects fourth quarter to benefit from optimization of business portfolio and productivity. The company also remains optimistic about the increase in prices of uncoated recycled paperboard, tubes and cores in the U.S. and Canada. This will aid Sonoco to counter increasing raw material costs. Conversely, uncertainty among customers due to the slow recovery in the U.S. and ongoing European weakness continue to act as headwinds for the company.

South Carolina-based Sonoco is a global provider of a variety of consumer packaging, industrial products, protective packaging and packaging supply chain services. Sonoco is also the largest producer of paper-based tubes and cores in North America.

Sonoco currently retains a Zacks Rank #4 (Sell). One of Sonoco’s peers Packaging Corporation of America (PKG) reported third quarter 2013 adjusted earnings of 91 cents per share, up 65% year over year primarily attributable to higher prices for corrugated and containerboard products. The earnings exceeded the Zacks Consensus Estimate by 2 cents.

Graphic Packaging Holding Co. (GPK) and MeadWestvaco Corporation (MWV), which belong to the same industry as Sonoco, are yet to announce their third quarter results.
 

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